Deduct the Alamo!

11/12/2014

In 1836, Mexican General Santa Anna and 1,500 troops laid siege against 182 Texans garrisoned at the Alamo, a Spanish mission designed to resist attack from native tribes. Thirteen days later, the Mexicans stormed the walls and killed every last man inside, including Commander William Travis and frontiersmen Davey Crockett and Jim Bowie. Santa Anna's cruelty inspired Texans to join their army to seek revenge, crying "Remember the Alamo!" on their way to crushing the Mexicans at the Battle of San Jacinto.

Remembering the Alamo has become a central part of Texas history. So, which Texas musician just offered a tax-planning lesson by donating his collection of Alamo artifacts to the Texas Land Office? Was it rock 'n' roll pioneer Roy Orbison, hailing from lonely Vernon near the Oklahoma border? Perhaps it was country legend Willie Nelson, born an hour south of Fort Worth? Wait, wait… was it Tejano accordionist Leonardo "Flaco" Jiménez from San Antonio? No, no, and no. The answer, of course, is English singer and drummer Phil Collins, hailing from the London suburb of Chiswick!

Collins fell in love with the Alamo legend at age 5, watching actor Fess Parker play the "King of the Wild Frontier" Davey Crockett. According to Texas Monthly, the rocker's collection includes hundreds of documents, "plus artifacts like uniforms and Brown Bess muskets that belonged to Mexican soldiers, a sword belt believed to have been worn by Travis when he died atop the northern wall, and a shot pouch that Crockett is thought to have given a Mexican soldier just before he was executed." For years, they sat in his basement in Switzerland. But last month, Collins donated over 200 of his pieces to go on display in a new Alamo Visitors' Center.

Collins grudgingly admits to spending "seven figures" building his collection. Today it's said to be worth as much as $15 million. That sort of appreciation would seem to invite attack from the troops at the IRS. (And collectibles like the Alamo artifacts are even subject to a special 28% rate, 8% higher than the regular 20% for regular long-term gains). But there's an easy way for donors like Collins to avoid that tax, and get an even bigger charitable deduction for their gifts.

Let's say you spend $5 million building a collection that grows to be worth $15 million. Then you decide you want it to go to a museum. If you sell it to the museum, you'll owe $2.8 million in capital gains tax, plus $380,000 in "net investment income tax" on your $10 million gain which still leaves you with just $6,820,000 of after-tax gain.

Now let's say that instead of selling your collection to the museum, you donate it. Now you won't pay any tax at all. (Why should you? You never really "realize" your gain.) And, because you're making a charitable gift, you get to take a charitable deduction for the full $15 million value of your donation!

That same strategy works for any sort of appreciated property. Let's say you paid $1 million for a piece of property, which is now worth $3 million. Now you want your alma mater to have that $3 million, even though you know they can't use the property itself. You could sell the property, donate the after-tax proceeds, and take a deduction for your after-tax gift. Or, you could just donate the property and let the school sell it. That would avoid the tax on the gain and give you a deduction for the full pre-tax value!

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